Ukraine's economy wilts under crisis but rescue hopes rise

Source: Reuters - Wed, 5 Mar 2014 16:19 GMT

Author: Reuters

* Government says economy hit by Crimea crisis

* EU ready to offer $11-billion euro loan

By Natalia Zinets and Pavel Polityuk

KIEV, March 5 (Reuters) - Ukraine's government said on Wednesday "Russian aggression" in Crimea was hitting the country's economy hard but signalled growing confidence that it will secure international loans and avoid bankruptcy.

Prime Minister Arseny Yatseniuk painted a picture of economic catastrophe in Ukraine at a government meeting, and set out plans to give more financial independence to the regions and provide the Crimean peninsula with subsidies.

"The Russian aggression on Ukraine's territory is having political and economic consequences," he said in televised remarks sitting with his cabinet in the government headquarters in the capital Kiev.

"The presence of the Russian military on Ukraine's territory is having an extremely negative effect on Ukraine's economy."

The damage to an economy driven into the ground by the previous government, he said, would be magnified by a drop in tourism revenues in Crimea following the Russian intervention.

But with the European Union ready to offer 11 billion euros ($15 billion) of financial support, and an International Monetary Fund mission holding talks in Kiev, the week-old government has reason for hope.

Ukrainian officials say the country of 46 million needs around $35 billion over two years to meet its debt payments and the hryvnia currency has been under heavy pressure, hitting a record low of 11.6510 to the U.S. dollar on Monday.

But the hryvnia has risen back to 9.40 per dollar because investors increasingly believe Ukraine will secure new loans quickly enough to avoid a default.

Kiev must repay a $1 billion eurobond in early June and the government has also guaranteed a $1.6 billion Eurobond issued by state energy company Naftogaz, which falls due in September.

Finance Minister Oleksander Shlapak made clear the government was confident of getting by without needing the rest of a $15-billion financial bailout package agreed with Russia.

He said he did not rule out continuing the programme, under which Moscow has so far bought Ukrainian Eurobonds worth $3 billion, but added: "If we can count on getting more attractive funds, we will no longer continue the Eurobond programme."

TABLES TURNED

His remark reflected the new reality since Moscow-backed Viktor Yanukovich was ousted as president last month.

Unable to persuade the EU to stump up more money last year, Yanukovich pulled out of planned political and trade pacts with Brussels and went begging to the highest bidder - Russia.

Now the tables have turned: the West has dramatically raised its offer and Moscow's is in doubt. The second part of the deal - on cut-price Russian gas for Kiev - is all but dead.

Yatseniuk has been gradually unveiling the outlines of the new government's plans for bringing the former Soviet republic's economy back from what he says is the edge of an abyss.

Earlier this week he announced plans to trim government spending by up to about 16 percent and said the government would meet any conditions set by the IMF to secure a new loan package.

On Wednesday he said it was vital to give more authority to the regions, hungry for financial and, in some cases, for more political independence.

"One of the main things the new Ukrainian government must do is dismantle the centralised power created in the last four years," Yatseniuk said, referring to Yanukovich's rule.

Although this is part of a long-running debate and applies to all regions, it can be seen partly as a gesture to Russian speakers in the east at odds with the central government.

The eastern regions are important centres of heavy industry and vital for the national economy. Their secession, or annexation by Russia, would be a major blow.

Ukraine has around $6.5 billion in foreign debt payments to make before the end of 2014 and needs a further $6.5 billion to cover its current account deficit, while it is also $1 billion in arrears to Russia for gas supplies.

Estimates vary but Goldman Sachs has said the central bank's currency reserves are down to $12-$14 billion, a sum which its obligations could wipe out.

The government hopes to secure at least $15 billion in loans from the IMF, and parliament has ratified a 610-million euro ($838 million) loan agreement with the EU that had been signed by the previous government but had not been ratified.

The EU said it was also ready to provide 11 billion euros of financial support to Ukraine over the next couple of years via a series of loans and grants, a deal that is in part contingent on Ukraine signing a deal with the IMF.

Visiting Kiev on Tuesday, U.S. Secretary of State John Kerry also promised $1 billion in loan guarantees to help reduce the impact of proposed energy subsidy cuts.

The IMF suspended its previous last loan programme with Ukraine because the government refused to raise domestic energy prices, which would have been unpopular for voters.

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